Suppose the Federal Reserve decided to purchase $30 billion worth of govemment s

Question

Suppose the Federal Reserve decided to purchase $30 billion worth of govemment securities in the open market a. By how much will M1 change initially if the entire $30 billion is deposited into transactions accounts? M1 will initially billion b. How will the lending capacity of the banking system be affected if the reserve requirement is 10 percent? Total lending capacity wll by c. How will banks induce investors to utillze this expanded lending capacity? funds As the money supply increases, interestrates wl and investors will want to borrow

Explanation / Answer

(a) M1 will initially increase by $30 billion.

(b) Total lending capacity will increase by $270 billion.

Total increase in loan = $30 billion x (1 - Reeserve ratio) / Reserve ratio = $30 billion x (1 - 0.1) / 0.1

= $30 billion x 0.9 / 0.1 = $270 billion

(c) As money supply increases, interest rates will decrease and investors will borrow more funds.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.